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Watson does not deny that there are problems with crime and fraud in our financial system. But then he coughs up one of the most insidious and hoary retorts to this problem: “Simply put, markets are not always consumer-friendly, which is why the principle of caveat emptor exists. But Livesey glosses over the need for consumers to better understand business cycles and investment risks. Instead, he expresses outrage over the fact that people have lost money that they can’t afford to lose investing in mutual funds. With all due respect to anyone who has lost money in equities, you don’t need to be an investigative reporter to know mutual funds are not recommended for folks interested in 100 per cent capital protection.”

This too is hogwash. As I pointed out to Watson in an email – to which he did not reply – in most cases of financial fraud or other disasters bedeviling our capital markets, the schemes are so well hidden and camoflauged that even seasoned industry insiders, let alone your average retail investor, can’t spot them. For example, in 2007, Barrick Gold, the world’s largest gold company, bought $66-million worth of third-party ABCP from CIBC World Markets. At one point Barrick’s people specifically asked CIBC whether this ABCP had any subprime debt exposure contained in it. CIBC lied to Barrick and said the paper had no such exposure, when in fact there was plenty of it. When the ABCP market froze that summer due to concerns about subprime mortgage exposure, Barrick’s money was frozen too, and the company was forced to sue CIBC to get its money back. Moreover, third-party ABCP was sold in Ontario without a prospectus, making it impossible for average consumers to know what sort of debt lay behind it. And when the Bay Street banking community received a report from Coventree Inc., an independent third-party ABCP seller, just prior to the market freeze, which detailed how much subprime mortgage exposure existed in its product, the bankers decided to keep this information from investors.

Then there is the case of John Paulson and Goldman Sachs conspiring to create a CDO filled with subprime mortgage debt that they specifically designed to explode in order for the bank and Paulson to cash in on investors’ $1-billion in losses. Goldman paid a massive fine after this scam was exposed. Yet this was engineered by be the most “reputable” investment bank in the world. Clearly, Paulson and Goldman’s did not advertise they were cooking up this scheme.

In fact, caveat emptor, or “buyer beware”, is always the fallback of the financial sector – “you should have never have trusted us in the first place.”

The Progressive Economics Forum » Intellectual Dishonesty at the Ivey Business Journal

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